Cheap oil: Dangerous for long-term

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Oil hovers below $79 after 3-day slideOil spikes to USD 81.26 a barrelOil eases to USD 78.65 a barrelOil tops $80, highest since Oct 14, 2008

London: Motorists must be glad the price of fuel is one thing they do not have to worry too much about as they face the worst recession since the 1930s, but cheap fuel is not good for anyone in the long run.

Global oil prices have collapsed since July, losing two thirds of their value from a peak of almost $150 a barrel and dragging fuel costs to their lowest levels for several years.

But while low energy costs come as welcome short-term relief to consumers and companies struggling with the financial and economic crisis, longer term they can be bad for everyone.

Low energy prices squeeze investment in the oil industry, reducing future supplies. They discourage energy saving and they destabilize countries dependent on oil exports, making oil in the future more likely to be expensive and even more volatile.

Perhaps most important of all, low energy prices stifle investment in alternative energy, deepening dependence on oil and other hydrocarbons and increasing greenhouse gas emissions.

"In the very short term, because we are in a recession, we could all use a low oil price," said Mike Wittner, global head of oil research at French Bank Societe Generale. "It is like a tax break, putting money back into pockets for a short time."

"But in the longer term, today's oil price is too low to support much new supply and will slow the momentum toward alternative fuels, new technology and conservation."

In a rare pronouncement on oil prices, Saudi King Abdullah said on Saturday that crude at $75 a barrel was "fair." Saudi Oil Minister Ali al-Naimi later explained that oil at that level would encourage new output from marginal, higher-cost sources.

"CHEAPER THE BETTER?"

The comment drew criticism from some quarters, including a response from Japan's minister of economy, trade and industry.

"There are frequent comments by oil producers about $60-$75 per barrel," Toshihiro Nikai told reporters in Tokyo. "For us, the cheaper the oil price, the better."

But most analysts broadly agree with the Saudi view, saying they are worried about the consequences of under investment and the need to prevent a shortage in the years ahead.

They say the comments by Japan -- almost entirely dependent on energy imports and seemingly on course for its longest-ever economic contraction -- reflect a short-term strategic view.